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IBRD and IDA: Working for a World Free of Poverty.enMIGA in Libya: Boldly Going Where No Political Risk Insurer Has Gone Beforehttp://blogs.worldbank.org/miga/miga-in-libya-boldly-going-where-no-political-risk-insurer-has-gone-before
<P style="LINE-HEIGHT: normal; MARGIN: 0in 0in 0pt; TEXT-AUTOSPACE: ; mso-layout-grid-align: none" class=MsoNormal><SPAN style="COLOR: black; mso-bidi-font-family: Calibri"><FONT face=Calibri><IMG alt="The New Libyan Flag" align=right src="http://blogs.worldbank.org/miga/files/miga/1364339_151556831.jpg" width=250 height=143></FONT>Last month, MIGA signed its very first <A href="http://www.miga.org/projects/index.cfm?pid=1208"><U><FONT color=#0000ff>contract of guarantee for a project in Libya</FONT></U></A>. The guarantee covers an investment by Jafara Company to expand a beverage and harissa plant outside of Tripoli. (Harissa, if you have never had it, is sometimes known as the "ketchup of North Africa" — a hot chili sauce used to spice up North African foods.) The €7 million contract, underwritten through MIGA's <A href="http://www.miga.org/investmentguarantees/index.cfm?stid=1801"><U><FONT color=#0000ff>Small Investment Program</FONT></U></A>, provides cover against losses due to expropriation, war and civil disturbance, and transfer restriction. The project came to MIGA through a private equity fund out of Tunisia, AfricInvest, which is indirectly investing in Jafara through a partial acquisition from its previous owner, the MIMS Group of Bosnia-Herzegovina.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN><BR><!--break--><BR>There were some difficult hurdles to overcome in this project. For one thing, MIGA was first approached just shortly before the February 2011 uprising and subsequent civil war. Once the war began, the project team had to tell the investor that, in line with the rest of the World Bank Group, activities in Libya would be put on hold until further notice. After the official end of the war in October 2011, the World Bank resumed operations and MIGA began underwriting the project, which had survived relatively intact. <BR><BR>The next hurdle was getting the necessary documentation in place for covering an investment in Libya. Although it has long been a member country, Libya never signed MIGA's ancillary documentation, the Legal Protection Agreement and Local Currency Agreement, which should be in place prior to issuance of a contract. In addition to the Legal Protection Agreement being missing, there was also no bilateral investment treaty between the investor country and the host country to which MIGA would be subrogated to in the event of a claim. Therefore, MIGA had no way of ensuring adequate legal protection in Libya, and needed to get the documentation in place. <BR><BR>In a post-conflict state, what would otherwise be simple administrative tasks can be quite overwhelming. The project team consulted with the World Bank country office and the office of the MIGA’s Executive Director for Libya.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>MIGA’s Executive Vice President even met with the Libyan Deputy Prime Minister, to explain the importance of getting these documents signed. There was clearly full support from the highest levels of government, but actually getting the right official to sign the documents proved increasingly challenging as outbursts of violence continued in 2012.</SPAN></P>
<P style="LINE-HEIGHT: normal; MARGIN: 0in 0in 0pt; TEXT-AUTOSPACE: ; mso-layout-grid-align: none" class=MsoNormal><SPAN style="COLOR: black; mso-bidi-font-family: Calibri">At one point we were told that the only person with the authority to sign these documents was unavailable. "It's impossible to reach him," my source told me. "Oh, he's that busy?" I replied. "No, it's literally impossible to reach him. He's hiding in a bunker somewhere."<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>The high-level official had gone into hiding after he put a halt to a controversial scheme to compensate those who fought against the former regime.<BR><BR>Nearly giving up hope, the project team relayed to the increasingly anxious investor that we once again had to put the contract on hold. And then one day in early September, thanks to the tireless efforts of the World Bank country office, we received the news that the ancillary documents had been signed! Before the end of the month, we were able to issue the contract, MIGA's very first project in Libya.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>Under the Gaddafi regime, private sector investment in Libya was limited to the oil and gas sector and is just now beginning to open up in other sectors.<SPAN style="mso-spacerun: yes">&nbsp; </SPAN>In fact, this contract represents the first time any World Bank Group lending or guarantee instrument has ever been used in the country.</SPAN></P>
<P style="MARGIN: 0in 0in 10pt" class=MsoNormal><SPAN style="COLOR: black; mso-bidi-font-family: Calibri">I don't know of any other insurer that would provide political risk coverage in a country less than a year after a civil war, where violence continues to erupt (including the most recent attack on the U.S. consulate in Benghazi), and where the newly established government is still very much in transition. But that is precisely what is meant by "frontier" states --due to our development mandate, we are truly operating at the frontier. <SPAN style="mso-spacerun: yes">&nbsp;</SPAN>As a result of MIGA's contract, Jafara was able to receive much-needed funds to continue operations, create over 150 jobs, and— we must not forget — provide Libyans with their beloved ketchup.</SPAN></P>Fri, 19 Oct 2012 17:14:23 -0400Hoda Atia MoustafaThe Nitty Gritty of Supporting Islamic Finance, from MIGAhttp://blogs.worldbank.org/miga/the-nitty-gritty-of-supporting-islamic-finance-from-miga
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">MIGA recently closed its second transaction supporting a project with an <IMG height=200 alt="" src="http://blogs.worldbank.org/miga/files/miga/large_1005659_mosque_in_indonesia_0.jpeg" width=200 align=right>Islamic financing structure—the first was for a </SPAN></SPAN><SPAN style="FONT-SIZE: 12pt; COLOR: black"><A href="http://www.miga.org/projects/index_sv.cfm?pid=733"><SPAN style="FONT-SIZE: small">port project in Djibouti</SPAN></A><SPAN style="FONT-SIZE: small"> back in 2007. For this </SPAN><A href="http://www.miga.org/news/index_sv.cfm?aid=3112"><SPAN style="FONT-SIZE: small">new project</SPAN></A></SPAN><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">, MIGA provided political risk insurance to two financial institutions, Deutsche Bank Luxembourg and Saudi British Bank, for their $450 million financing to the Indonesia telecoms company PT Natrindon Telepon Selular, or NTS.<!--break-->The company is majority-owned by Saudi Telecom, and the deal formed part of an overall $1.2 billion financing to help NTS greatly expand its GSM network in Indonesia. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small">MIGA is behind the transaction because the new financing will help the company increase network quality and expand coverage, getting telecommunications to lower-income segments of the Indonesian market as well as to remote islands of the archipelago.</SPAN></p>
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">Unlike the Djibouti transaction, which involved Musharaka financing, the NTS project involved a particular type of Islamic finance known as Murabaha financing. It essentially involves a sale and purchase of commodities. There are four basic steps, which happen instantaneously, and four basic players: </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><STRONG><SPAN style="COLOR: black">Step 1.</SPAN></STRONG><SPAN style="COLOR: black"> Financier buys commodities at market price from a commodity seller. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><STRONG><SPAN style="COLOR: black">Step 2. </SPAN></STRONG><SPAN style="COLOR: black">Financier sells the commodities to the project company at a deferred price, with a profit component, so that the sales price plus the profit component matches an amortization schedule on a loan. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><STRONG><SPAN style="COLOR: black">Step 3.</SPAN></STRONG><SPAN style="COLOR: black"> The project company sells the commodities to a commodity purchaser at the sales price. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><STRONG><SPAN style="COLOR: black">Step 4. </SPAN></STRONG><SPAN style="COLOR: black">The commodity purchaser sells the commodity back to the original seller at the sales price. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">Since this all happens instantaneously, the commodities never actually change hands, and the transactions are recorded by book entry only so that the financier directly funds the project company. However, though this mechanism—unlike a loan—there is no actual "interest" component, which is prohibited under Islamic law. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">Although the concept is fairly simple, the documentation was far from it. To add to the complexity, there were a number of novel issues to be addressed. To give a few examples:&nbsp;(1) there are three separate tranches of funding, and MIGA is covering a minority share of the financing, which had implications for MIGA's policy covenants; (2) two separate currencies are being utilized, whereas the MIGA guarantee was only in US Dollars, so the potential currency fluctuations needed to be tackled; (3) There were challenging details to work out over coverage of principal and profit (analogous to the interest component of a conventional loan), which resulted in MIGA covering 100% of principal of a loan for the first time. (4) there is additional sponsor support and we had to ensure that there was no overlap in coverage; (5) the financing was being syndicated after closing, potentially to a sukuk issuance, and the banks wanted to ensure that syndicates had could "opt-out" of MIGA cover; (6) as the project company is responsible for paying the premium, special provisions and timing arrangements needed to be included for any instance where it may fail to do so; and (7) MIGA had to obtain reinsurance from the private market, so all of these special provisions were subject to reinsurance approval. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">As the attorney on the transaction, I was responsible not only for drafting the MIGA guarantees—including negotiating and drafting all of these special provisions—but also reviewing all of the underlying documentation. For me, this was the most complicated transaction I have ever worked on, and it was a huge challenge for the team to tackle all of the issues that needed to be addressed. </SPAN></SPAN></p>
<p><SPAN style="FONT-SIZE: small"><SPAN style="COLOR: black">In the end, however, we did finally come to agreement on all points, and were able to issue MIGA's first-ever contract of guarantee for Murabaha financing. This is an important demonstration of MIGA’s increasing flexibility and, given the growing role of Islamic financial markets in supporting projects in developing countries, it was indeed a landmark transaction.</SPAN></SPAN></p>Mon, 01 Aug 2011 15:29:47 -0400Hoda Atia MoustafaHonor Thy Sovereign Financial Obligations http://blogs.worldbank.org/miga/honor-thy-sovereign-financial-obligations
<p><SPAN style="FONT-SIZE: small">In December 2010 and again in April 2011,<IMG height=199 alt="" src="http://blogs.worldbank.org/miga/files/miga/turkey_metro.jpg" width=300 align=right> MIGA issued contracts representing many "firsts" for the agency -- our first two non-honoring of sovereign&nbsp;financial obligations&nbsp;contracts, our first coverage for stand-alone debt, and first coverage for sub-sovereign credit risk.&nbsp;I was fortunate enough to have worked on both projects, which support public transport in Istanbul, <!--break-->as well as on the template non-honoring contracts for MIGA. &nbsp;These firsts were a result of recent, historic amendments to MIGA’s operational regulations and our convention.</SPAN></p>
<p><SPAN style="FONT-SIZE: small">With these projects, we have finally unharnessed the power of the non-honoring product, which protects against losses resulting from a government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee given in favor of a project. While authorization to provide this cover has been in place since April 2009, without the ability to cover stand-alone debt, its application was quite limited. This is because demand for this product is largely driven by commercial banks providing loans to public sector entities, where there is no "private" equity for MIGA to cover -- heretofore a requirement under our convention. The projects in Istanbul, which MIGA had been working on for nearly two years, went through many re-iterations, various complex structures, different covers, reinsurance structures, etc. I remember the call shortly after MIGA's convention was amended last November via a supermajority approval of the Board of Governors of MIGA's member countries. We told our very patient clients at WestLB that at long last we could cover the loan directly and also cover existing projects. We could almost hear the thought going through their heads: "Really, you can do that now? Seriously?" You betcha -- less than six weeks later, the contract was issued. And less than four months later, we worked with the same client to issue a contract on behalf of six international banks for a 280 million Euro loan financing a major project in Istanbul that could not have happened without MIGA cover in place.</SPAN></p>
<p><SPAN style="FONT-SIZE: small">Aside from the unleashing of MIGA's potential in this arena, the projects themselves are great ones. They support the Otogar – Bagcilar – İkitelli – Olimpic Village and Kadikoy-Kartal-Kaynarca Metro expansions , &nbsp;and the obligor in each case is the Municipality of Istanbul. In a city of approximately 15 million, Istanbul is in great need of this major expansion of its public transportation system. It will alleviate traffic and congestion in one of the largest cities in the developing world, increase access to jobs, and reduce carbon monoxide emissions in the process. The Basel-II relief that this product afforded commercial banks is also essential, as it enables them to expand their capacity for exposure to Turkey for future projects.&nbsp;</SPAN></p>
<p><SPAN style="FONT-SIZE: small">But for MIGA, this was a true market test of a new and very powerful product that has been an important element of the political risk insurance market for some time. Unlike most of our political risk insurance products, this contract contains limited exclusions and termination provisions, and provides a clear and streamlined timetable for claims determination, operating more like a financial guarantee than a limited insurance product. Because MIGA is essentially providing credit enhancement to a government-entity, this required a fundamental change in our underwriting approach; we looked at the loan more as a lender than as a political risk insurer, and were very involved in the each stage of the negotiations.&nbsp;</SPAN></p>
<p><SPAN style="FONT-SIZE: small">This is a very exciting and busy time for MIGA; with new products being rolled out and new capabilities post-convention change, we have more flexibility to cover different kinds of projects than ever before. The sky’s the limit!</SPAN></p>Mon, 13 Jun 2011 10:55:19 -0400Hoda Atia MoustafaYou Say You Want a Revolution...http://blogs.worldbank.org/miga/you-say-you-want-a-revolution
<p><span style="font-size: 10pt">As I return from a week-long mission to Lebanon and Jordan, where I took part in a workshop to teach government agencies about MIGA's mission and products and met potential clients to discuss prospective collaboration, <img height="227" alt="" width="300" align="right" src="/files/miga/cairo-tahrir-square.jpg" />I am struck at how much unchartered territory there is for us in this ever-changing and turbulent region.&nbsp; <br />
<br />
During the 18 days of the Egyptian revolution that began on January 25, I was glued to the news media -- and to Facebook, which proved to be a vital source of information quicker than any news agency -- to try to get news of what was happening and ensure that my family and friends back in Egypt stayed safe.
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Since then, I have followed closely Egyptians and expatriates' efforts to rebuild the country, most certainly filled with problems and bumps along the way, but in an atmosphere that gives the people hope for the future. Now is the time to shine.<br />
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My colleagues in Lebanon and Jordan spoke often of the revolution, of its after-effects on the region, of how the world was and continues to watch events unfold. Being a representative of the only agency of the World Bank Group that deals exclusively with political risk, I also see a unique opportunity for MIGA. Now is the time for us to take on risks ourselves in order to maintain existing investment in the region and encourage new investment from abroad. <br />
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MIGA's <a href="http://www.miga.org/guarantees/index_sv.cfm?stid=1547">war and civil disturbance cover</a> can be a powerful tool to accomplish this. With products such as temporary business interruption providing compensation to investors for lost profits during a halt in operations due to riots and civil disturbance, and asset cover for any property or assets destroyed or damaged during the same, many of the business that suffered in the revolutions in Tunisia and Egypt would have enjoyed protection against these risks. As new governments are formed which may or may not be friendly to certain foreign investment, investors can take comfort in MIGA's <a href="http://www.miga.org/guarantees/index_sv.cfm?stid=1547">expropriation cover</a> to ensure protection against government take-over as well as <a href="http://www.miga.org/guarantees/index_sv.cfm?stid=1547">breach of contract </a>cover to ensure that even new governments respect existing contractual obligations. <br />
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Perhaps even more importantly MIGA now has the ability to cover existing investments, so that entrepreneurs who previously ignored these risks can still take advantage of these covers nonetheless. MIGA has no exposure in Tunisia, Egypt, Libya, Lebanon or Jordan&nbsp;&nbsp; -- meaning we have plenty of capacity for projects there. Of course, like any insurance company, coverage in places that are now riskier will be priced accordingly, but the very fact that MIGA is open and active in these countries puts us ahead of the private market, which tends to shy away from such risky areas once the turbulence has begun.<br />
<br />
The World Bank is following the events in the broader Middle East intently, poised to help where possible. We are looking at how we can assist with some of the underlying sources of tension that have development concerns at their root &ndash; such as the region&rsquo;s dearth of jobs for its youth. The Bank also recognizes the need to engage civil society and not just government institutions. I believe MIGA has an important role to play in the region in assisting these countries attract and retain foreign investment by protecting them against the very risks that are feared the most. <br />
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Political risk is our business. As exciting as it is to see history in the making before our eyes, the reality can also be quite terrifying. On both a personal and professional level, I very much want to be a part of the rebuilding and reshaping of this dynamic and important region. And I truly believe we can.</span></p>Wed, 16 Mar 2011 17:34:08 -0400Hoda Atia MoustafaPolitical Risk Insurance at the Forefront of Carbon Financehttp://blogs.worldbank.org/miga/political-risk-insurance-at-the-forefront-of-carbon-finance-yes
<p>Reduce. Reuse. Recycle. Green is the new black. With all of us more aware of global warming and the need to save our environment, the big question we at MIGA are asking is: what can we as an institution do to contribute?</p>
<p><img alt="Political Risk Insurance at the Forefront of Carbon Finance" hspace="3" align="left" vspace="3" border="3" style="width: 264px; height: 257px" src="/files/miga/climate_earth(1).jpg" /></p>
<p>One answer is that we can continue to do what MIGA has always done: supporting private investors. Specifically, however, MIGA can support those investors in the now well-established market of certified emission reductions (CERs) that are freely tradable on the European market, but depend heavily upon activities undertaken in developing countries. Investors relying on CERs as returns on their investments (in lieu of dividends) want assurance that governments that have signed up to the Kyoto Protocol will not renege on their commitments. This is very much a political risk, and with the right structuring is potentially a powerful political risk insurance product line.</p>
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<p>Here is how it works: under the Kyoto Protocol, the UN Framework Convention on Climate Change (UNFCCC) has created a Clean Development Mechanism (CDM), which allows industrialized countries to invest in emission reductions wherever it is cheapest globally, so long as this takes place in countries that are signatories to the Kyoto Protocol. Often the least expensive emission reductions occur in lesser developed countries. When approached by the investor, the host government issues a statement, called the Letter of Approval (LoA) validating that a particular activity will assist the country in its sustainable development objectives. Once the LoA is issued, and the investor receives the appropriate licenses and permits to undertake its activities, it quantifies its reduction of carbon emissions through an independent expert accredited by the UNFCCC. This expert verifies the reductions, which are then referred to as &quot;Verified Emission Reductions&quot; (VERs). The VERs are then taken to the country's UNFCCC body where they are officially certified and transferred into CERs where they are bought and sold in industrialized countries that are signatories to Kyoto. (Although Kyoto is set to expire in 2012, all indications are that the market for CERs will continue to exist thereafter). The CERs can be used by companies to offset activities that increase carbon emissions. This is sort of like controlling your energy bill by using less energy to heat one room in your house and using the energy saved to heat another.</p>
<p>So where does political risk insurance fit in? Since the CERs constitute an investors&rsquo; return on investment, they want certainty, just like with any other investment, that the government will not interfere with their ability to capture this return. This can include the risk of expropriation of the investment, revocation of the LoA, failure to allow the CERs to be transferred outside the host country, and war and civil disturbance that damages the underlying project. These are all traditional political risks that MIGA and other providers can cover; they just need to be fit into the CDM world.</p>
<p>MIGA has already received several inquiries regarding projects such as these. One contract was already issued for a project in <a target="_blank" href="http://www.miga.org/projects/index_sv.cfm?pid=671">El Salvador</a> back in 2006, and projects in our pipeline include several in sub-Saharan Africa. These involve the flaring of methane in landfills, transforming the gas into carbon dioxide, which is 21 times less potent than methane, and will significantly reduce the landfills' emissions.</p>
<p>Hopefully, by putting our footprint in the CDM world, MIGA can manage our own carbon footprint on the global scene by actively supporting projects such as these.</p>Fri, 22 Oct 2010 14:49:11 -0400Hoda Atia MoustafaTBI - New and Innovative Political Risk Coveragehttp://blogs.worldbank.org/miga/tbi-new-and-innovative-political-risk-coverage
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<p>This has been an exciting year for <a href="http://www.miga.org">MIGA</a>, in part because the agency has introduced changes to its policies and operational regulations enabling it to provide <a href="http://www.miga.org/documents/new_products_flyer.pdf">new and innovative types of coverage</a>.&nbsp;<br />
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One such cover which is particularly relevant in today&rsquo;s market is <a href="http://www.miga.org/guarantees/index_sv.cfm?stid=1547">MIGA&rsquo;s new temporary business interruption (TBI</a>), a product offered as a subset of MIGA&rsquo;s traditional war and civil disturbance coverage. TBI covers equity investors against losses arising from a war, civil disturbance, or terrorism event in the host country that causes a temporary shutdown due to asset damage, forced abandonment, or loss of use. Unlike the traditional cover which requires a total abandonment and &ldquo;walk-away&rdquo; by the investor, TBI enables investors to shut down for as little as 30 days and for up to a year while still maintaining a financially viable and even profitable operation. The key to this cover is the unique compensation structure, which goes beyond coverage of damage to assets to actually cover a company&rsquo;s lost income during the period of shutdown. Compensation extends to continuing expenses, such as payroll and debt service; includes those extraordinary expenses required to resume operations more expeditiously, such as relocating the project to a safer area or renting replacement equipment; and perhaps most importantly covers the actual lost income, including the company&rsquo;s profits based on historical earnings. <br />
&nbsp;<img hspace="5" height="170" border="5" align="left" width="202" src="/files/miga/tbismall(2).jpg" alt="" /><br />
This product should prove particularly useful to <a href="http://www.miga.org/guarantees/index_sv.cfm?stid=1555">investors operating in post-conflict countries</a> where the possibility of political violence recurring is very real. Because these areas tend to be so inherently risky, investors rely on high profit margins as incentive for operating in these regions. With MIGA&rsquo;s TBI cover serving as an additional protection against potential losses due to necessary but temporary shutdown, investors will be further incentivized not only to initially invest, but to continue operating even after a political violence event occurs. No longer must a company abandon its project in order to collect on MIGA&rsquo;s insurance policy; it can continue operating seamlessly as a profitable enterprise, and MIGA will assist it to get up and running. This very powerful tool could potentially have great developmental impacts in countries such as <a href="http://www.miga.org/documents/IGGafghan.pdf">Afghanistan </a>where investments are so desperately needed.<br />
&nbsp;</p>Thu, 03 Dec 2009 14:42:24 -0500Hoda Atia Moustafa